Captive insurers have traditionally generated revenue through premiums and investments, but many are missing out on recovering paid claims through subrogation. Commercial insurers invest heavily in subrogation and recover over a billion dollars annually, while few captives pursue this avenue. Pursuing subrogation could recover millions for captives, but many lack dedicated staff and data collection systems. Outsourcing subrogation to specialized lawyers on a contingency basis provides a cost-effective option for captives to start recovering losses paid to third parties.

1. SUBROGATION | FEATURE
19June 2015
captivereview.com
G
enerating revenue for a cap-
tive insurance company has
traditionally taken place in
two forms: premium and
investment income.
Premiums of course are earned in the
anticipation that a much larger sum will
eventually be sent back the other way,
while investment income can be risky,
undesirable or negligible.
There is a way, however, to recover
a meaningful proportion of those paid
claims by proving third party liability
at the original loss event. In such cases that
is money rightfully owed to the captive.
Subrogation, in short, is when the
rights of the insured are transferred to
the insurer after a claim has been paid.
For the past 20 years the large national
and global insurance carriers have been
investing and building up their subro-
gation departments – State Farm’s sub-
rogation unit is said to total around 800
employees and recovers $1.5bn a year in
paid claims.
So are captives following suit? The
answer is slowly, but very few.
“I find that the self-insureds and the
captives are trailing way behind what the
carriers have done and where this area
has gone over the years,” Jeffrey Baill,
partner at Yost & Baill in the United States
and founder of the National Association
of Subrogation Professionals (NASP), tells
Captive Review.
This lag can in part be put down to
significantly smaller risk management
and claims handling departments com-
pared to the large insurance companies
or under-investment in the captives
themselves.
In essence, insurance is not the pri-
mary or even secondary business func-
tion of a large manufacturing, retail or
energy firm.
“Very few self-insureds have a ded-
icated subrogation person so they are
more following a model which is 20 or 30
years old,” Baill adds. “As a result of that
they are not identifying the opportuni-
Written by
Richard Cutcher
THE MISSING MILLIONS?Commercial insurance companies have invested significant time and money into recovering paid
claims to third parties, so is it time captives followed suit?
019_020_CR140_CoverFeature.indd 19 15/05/2015 10:51

2. FEATURE | SUBROGATION
20June 2015
captivereview.com
ties as well, they are not pursuing them
as effectively.”
Data collection
The answer for the majority of captive
owners, however, is unlikely to be hiring
an internal subrogation specialist.
In the United States and the United
Kingdom the ability to hire “no win no
fee” lawyers to carry out the necessary
investigations and legal work ensures a
cost efficient approach can be utilised.
Some countries in Europe do not per-
mit such services and makes this route
more difficult.
The key to establishing an effective
and efficient subrogation programme,
whether managed in-house or out-
sourced, is putting in place strat-
egies to collect key data when the
original claim is made.
“Captives are missing a trick
because if the policyholder has a
good scheme to capture the details
of the losses it suffers there are
plenty of specialists who are willing
to do no win no fee work,” Cathe-
rine Hawkins, an insurance recov-
ery specialist and partner at law
firm BLM in the UK, tells Captive
Review.
“This works for large claims, but
also smaller and more frequent losses too.
If the policyholder, for example, owns car
parks and drivers regularly hit the barriers
and damage them, then you could organ-
ise a system to record number plate infor-
mation and pursue recoveries.”
It is important to note the very nature
of subrogation in no way effects the speed
at which a claims payment is received by
the insured.
The rights of the insured to seek third
party compensation only transfers to
the insurer once the claim has been paid
in full.
“In the captive case the parent com-
pany is going to want to get whatever has
been damaged back on the road or back
in business as soon as possible,” says Greg
Zarin, president of North American Sub-
rogation.
“If somebody else is perceived to be
at fault and there is a dispute over third
party liability then that can take time.
Rather than tie up the business in going
after a third party, you can pay the claim
and address the issue by outsourcing the
subrogation efforts as a contingency fee.”
In theory, this should create a win-win
situation for the parent and ultimately
the captive.
Transcending the captive
Les Boughner, a captive management
veteran of more than 20 years formerly of
Willis and AIG in North America, agrees
with the subrogation advocates that cap-
tives are missing a trick and it is a tactic
rarely, if ever, discussed by the managers
with the parent company.
He says he only sees captives involved
in subrogation when participating in a
large insurance programme alongside a
commercial carrier.
“It transcends captives,” Boughner tells
Captive Review. “There is always a lot of
money to be made through aggressive
subrogation so any time a captive sup-
ports an insurance programme that is
being subrogated there is benefits for the
captive. Have I seen it a lot? No.
“It is generally a very large loss and a
loss that involves an insurance recovery
for the carrier as well.”
Boughner says he has never witnessed
an example of a captive subrogating a
pure loss, but adds there is no reason why
that should not happen.
“If you have got a $500,000 or $250,000
loss that somebody feels could be subro-
gated and works for 10% there is no rea-
son you shouldn’t pursue it. But I would
say typically it is not pursued.”
The question can be posed then that
if the large carriers typically fronting
captives are engaged in “aggressive sub-
rogation”, how much of any recovery is
making its way back to the captive and
replenishing its balance sheet?
It seems in some cases very little, since
the carrier underwriting the largest slice
of the cover will be prioritised when
recoveries are dished out.
Hawkins cites the example of a captive
writing the first £1m of a policy and the
insurer writing a £10m layer on top of
that.
If subrogation takes place and £8m is
recovered then in the majority of cases all
of that would go to the carrier rather than
the captive.
“It will be indirectly good for the cap-
tive because the carriers will be pleased
they have got their money back and con-
tinue viewing the client as a good risk to
take on,” she says.
This approach could go some way to
explain why the large fronting compa-
nies do not make subrogation a key ser-
vice differentiator when pitching to cli-
ents – in effect, engaging in subrogation
only when it impacts their bottom
line.
Just as he believes captives are
missing a trick by not exploring
subrogation, Baill thinks the front-
ing companies are ideally placed
to address the client oversight and
expertise gap.
“If I was one of those fronting
companies that would be one of my
sales pitches for how I could add a
value added service,” he says.
Subrogation potential
It is difficult to quantify the amount of
money captives could be missing out on
by not utilising subrogation methods.
A clue, however, could lie in annual
benchmarking data collected by the
NASP from its members. In 2013, the
industry was recovering 4.22% in paid
commercial property claims and in 2012
commercial auto lines it was around
12.8%. Workers’ compensation sits at
1.58% of paid claims.
“We also benchmark high performers
and low performers and in auto there is a
difference of almost 10%,” Baill adds.
“The low performance was around
12% and the high performance was in the
20% range. What that told us was how
companies were organised and how they
operate really matters in terms of their
success rate.”
Engaging in subrogation may not suit
all captive owners, but as budgets are
squeezed and parents seek greater justi-
fication for maintaining a captive those
missing millions could be the final piece
in the jigsaw.
“If the policyholder has a
good scheme to capture
the details of losses there
are specialists willing to do
no win no fee work”
Catherine Hawkins
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